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Cover Story : US Power Market Lags Behind

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April 01, 2005

Project Finance Activity Reaches Fever Pitch

US Power Market Lags Behind

Jeff Thornton, Royal Bank of Scotland

Meanwhile, there are more than 40 LNG projects in the pipeline in the US, including a handful that already have been approved by the Federal Energy Regulatory Commission and a dozen that are awaiting US Coast Guard clearance, says John Hawkins, Stamford, Connecticut-based chair of the global projects group at Paul Hastings. “The cost and logistics may be prohibitive in some cases, and communities have expressed security and environmental concerns,” he says. “Communities near receiving terminals have expressed concern about the potential release of gas in a highly populated area,” he explains. “They also fear the LNG tankers could be targets for terrorists. Actually, the LNG wouldn’t likely explode if a tanker were attacked but would most likely flare off,” he says.

Meanwhile, the US power sector has stabilized following the California energy crisis and the Enron turmoil, although it may be another year or two before there is a major upturn in activity, Hawkins says. “Most of the big utilities and independent power producers that filed for bankruptcy protection have emerged, and most large portfolios of assets have been sold,” he notes.

There is a tremendous amount of liquidity in the US market, with private equity and investment funds dedicated to energy making substantial investments, and investment banks becoming more involved in buying assets and trading power, Hawkins says. “But it will take more time before there is substantial new development of power projects in the US,” he adds.

John Hawkins, Paul, Hastings, Janofsky & Walker

The volume of project financing in North America increased 75%, to $26.3 billion, in 2004, according to Dealogic. Refinancings accounted for $10.5 billion of last year’s total, and acquisitions another $8 billion. The largest deal in the region was the Texas Genco acquisition, worth $3.7 billion. The Houston-based company is one of the largest wholesale electric-power generators in the US.

European issuers were the most active in the project finance market last year, with more than $64 billion of transactions, an increase of 62% from 2003, according to Dealogic. The largest deal in Europe in 2004 was the $5.5 billion refinancing of telecommunications operator Auna in Spain. Refinancings accounted for 40% of the region’s volume last year.

“Judging by the number of deals in the pipeline, the project finance volume will certainly be maintained in 2005,” says Jeff Thornton, head of the infrastructure finance group at Royal Bank of Scotland. “There will be more rail and road infrastructure projects in Europe this year, including France, Spain and Portugal and the EU accession countries, such as Hungary and the Czech Republic,” he says.

The financial closing for the Perpignan-Figueras high-speed rail line, which will link the French and Spanish high-speed rail networks with a tunnel under the Pyrenees, was announced in February 2005. Totaling more than _1 billion, the project is the first cross-border rail line financed by the private sector since the deregulation of the European rail-freight market and the construction of Eurotunnel. The financing includes a 35-year debt maturity, which is unusual for a project of this type.

Raj Pande, Paul, Hastings, Janofsky & Walker

Meanwhile, the Italian government is officially looking for a contractor to build the world’s largest suspension bridge, across the Strait of Messina, linking the island of Sicily to the Italian mainland. An independent judging commission is scheduled to hold its first meeting on April 27 and will select a general contractor by mid-year to prepare the final design. When completed in 2011, the main span of more than two miles would nearly double the current record held by the Akashi Kaikyo Bridge in Japan.

The total cost of the project is estimated at $5.5 billion. This includes the crossing itself, as well as its road and rail links. The majority of the capital for the project will be met through loans on international financial markets that will be guaranteed by the cash flows generated during the 30-year operating period. The bridge will be designed as part of a broad plan to improve the transport infrastructure in southern Italy.

One major UK infrastructure project, the planned $17 billion east-west rail link under London, known as Crossrail, now seems unlikely to be funded with project financing techniques, according to Thornton of RBS. The project, which is still being debated in Parliament, may instead rely on direct government subsidies and a private-sector contribution through a special tax.